11690-1(ar)
D. Laflèche
File No: 11585-35; 11783-2
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Subject:
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GST application
XXXXX
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Ms. XXXXX
This letter is in reply to the memo from XXXXX of your office wherein he requested clarification of our position, stated in a letter dated January 5, 1995 concerning the above-noted subject. Specifically, he requested clarification as to the correct GST treatment of foreclosures by the creditors subsequent to a default by the lessee of the installment sales contract or the pledge, and of rescissions and repudiations of the timeshare sale contracts by the lessee.
As we had mentioned in our January 5, 1995 letter, we would like to reiterate that the supply of the timeshare by XXXXX is a supply of real property by way of lease, licence or similar arrangement rather than a supply by way of sale, because the interest does not appear to provide the lessee with legal title to the real property. However, although the lessee does not have title to the real property, he still has an interest in real property, and such an interest is defined as real property for GST purposes. Thus, it is our view that any resupply by the XXXXX and by the lessee of the timeshare is a supply by way of sale of an interest in real property, which may be subject to tax if it does not satisfy the exemption provisions of Part I of Schedule V.
Foreclosure of a lease financed by another creditor (i.e. XXXXX[).] You have requested clarification as to the GST treatment in circumstances where the XXXXX forecloses on the pledge agreement.
It is our view that provided that the vacation lease is not nul and void when the debtor defaults and provided that the pledge does not form part of the lease, where the XXXXX sells the lessee/debtor's timeshare to XXXXX, the supply will be deemed, pursuant to ss. 183(10), to be a seizure immediately before the sale as the XXXXX is exercising its right under the pledge (which is a debt security) to cause the supply.
The sale of the timeshare by XXXXX is a supply by way of sale of an interest in real property which is taxable as it does not appear to satisfy the exemption provisions of Part I of Schedule V.
Our review of the XXXXX notes provided indicated that when XXXXX buys back the timeshare from XXXXX it records the buyback amount as an expense for accounting purposes. It is not clear from the information provided whether GST is charged by XXXXX and whether XXXXX claims an ITC on the buyback amount. The notes also indicate that XXXXX is transferring the amount of the outstanding loan into XXXXX account, amount which constitutes the buyback value, but there is no indication whether or not GST is charged to XXXXX. Our view is that there may be a need for an assessment in such circumstances.
Foreclosure of a lease financed by XXXXX[.] You have requested our position as to the GST treatment in circumstances where XXXXX forecloses on the installment sales contract. You have further requested our position on the GST status of the administrative fees charged when XXXXX forecloses.
It is still our view that where the lessee has defaulted for more than 120 days, he is voluntarily transferring his interest in the villa to XXXXX[.] This view is based on the fact that the contract provides for the automatic relinquishment of all of the lessee's rights and responsibilities in the lease to XXXXX and provides XXXXX with full power of attorney to transfer ownership of the lessee's interest to another party. Thus, it is our view that the provisions of ss. 183(9) apply to the relinquishment and that as a result, the relinquishment is deemed to be a seizure in circumstances in which ss. 183(1) applies.
With respect to the administrative fees charged, our understanding of the accounting treatment by XXXXX of the foreclosures when the lessee has defaulted on the contract for more than 120 days is that XXXXX
i) writes off the initial amount of the installment sales contract to an expense entitled Lease Cancellation,
ii) reverses the full amount of the GST charged on the supply of the timeshare to the lessee, and
iii) records in income all amounts received from the lessee as payments under the installment sales contract.
Our understanding is also that XXXXX does not charge any GST on these administrative fees.
You have suggested that although the installment sales contract is foreclosed, GST is still due on the full amount of the lease, that no relief is available when XXXXX forecloses and that no GST is due on the administrative fees because the GST had been reported at the time the lease was entered into. We agree that GST is due on the full amount of the lease even if XXXXX has foreclosed on the installment sales contract since the supply by way of lease is not nul and void.
In respect of the administrative fees, it is our view that the amount recorded in income as Administrative Fees constitutes payment on account of the loan, the balance of which is subsequently written off to the Lease Cancellation expense when XXXXX forecloses. Thus, we agree that these "Administrative Fees" are not subject to the GST.
With respect to whether any relief is available to XXXXX when foreclosing, it is our opinion that if the amount written off is in fact a bad debt that is written off in XXXXX books of account because the loss may not be recaptured, then XXXXX is entitled to deduct an amount equal to the tax fraction of the bad debt written off (lease cancellation amount) pursuant to ss. 231(1) as this balance includes the consideration and the tax that were payable on the supply of the timeshare. However, if the loss is later recaptured when XXXXX sells the interest to a third party, then XXXXX will be required to add back in its net tax the tax fraction of the bad debt recovered, pursuant to ss. 231(3).
Rescission of lease within 7 days after the agreement is entered into.
You have also requested our position in respect of the GST treatment in circumstances where the lessee rescinds the vacation lease within 7 days of entering into the lease. You suggest that there is no GST due to the Department by XXXXX in such circumstances since the rescission has the effect of bringing both parties to the position they were in if the contract had not been entered into, and accordingly, that any GST collected should be refunded to the lessee.
Our understanding of clause 5 of the vacation lease is that it provides the lessee with the right to rescind the agreement within 7 days after entering into the lease. It also provides that where the lessee paid monies to the lessor and rescinds the lease within 7 days after entering into the agreement, XXXXX is contractually required to refund the lessee for all monies paid.
Our interpretation is that a rescission has the effect of voiding the lease. Accordingly, we agree with you that any GST collected by XXXXX should be refunded to the lessee. Thus, the provisions of subsections 232(2) and 232(3) apply so that the supplier/lessor may refund or credit the purchaser/lessee for the tax and that the supplier/lessor may deduct the particular amount refunded or credited from his net tax. Note that where the lessee did not pay the GST to the lessor and rescinds the lease in this particular circumstance, the lessor can only reverse and cancel the vacation lease and adjust the tax charged accordingly.
Repudiation of lease after 7 days of entering into the agreement
Finally, you have asked us for our position on the GST impact of a rescission of the vacation lease if executed after the expiration of the 7 day rescission period. More precisely you have requested our position on the GST status of the administrative fees charged and on the forfeited deposits.
Our understanding of clause 5 of the vacation lease is that it also provides the lessee with the right to repudiate the lease where he has not received his certificate of "leasehold" interest from the trustee within 5 months of the date of payment of the purchase price, by providing written notice to the trustee. In such circumstances, the trustee must return to the lessee all monies paid by the lessee together with all accrued interest.
You also suggested that in addition to the above possibility of repudiation, that as a business practice it is also frequent for XXXXX to accept a repudiation of the contract by the lessee even where the 7 day period expires and the criteria of clause 5 of the lease (i.e. that the lessee has not received his certificate from the trustee within 5 months ...) are not met. You have also advised us in your memo that in these particular circumstances, the supplier/lessor forfeits the lessee's deposit since the vacation lease had not provided for such a repudiation.
We would like to clarify that when the lessee exercises this right after the expiration of the 7 day period, the vacation lease is repudiated not rescinded. The difference is that by repudiating, the lessee is refusing to perform his obligations under the lease but this does not mean that the contract is canceled, whereas by rescinding, the lesse is actually canceling the contract.
According to clause 5 of the vacation lease, where the lessee repudiates the lease because he has not received the certificate from the trustee, the lessor is required to return to the lessee all monies paid along with any accrued interest. In such circumstances, we are of the view that a reduction in consideration occurs and accordingly, that the provisions of section 232 apply. Since no amount is retained by the lessor in these circumstances, then no additional GST is payable.
Where the lessee repudiates the lease in any other circumstances, we are also of the view that the lessor has agreed to reduce the consideration for the supply by accepting a repudiation by the lessee. This is our view whether the consideration for the supply of the lease had been paid to XXXXX or financed by XXXXX[.] Accordingly, the provisions of section 232 will also apply in these circumstances.
With respect to the forfeited deposit, it is our position that the provisions of s. 182 do not apply since the forfeited deposit can be construed as consideration for a taxable supply of the interest in real property and since tax had already been paid on the supply.
If you have any questions, please contact Duncan Jones at (613) 952-9210 or Danielle Laflèche at (613) 952-0329.
J. Sitka
A/Director
Financial Institutions and Corporate Reorganizations
GST Rulings and Interpretations
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